this is what I think quantitative easing is, why the UK may try it very soon and why it will prove a negative for the pound. well, if ZIRP (zero interest rate policy) fails to kickstart the economy or put it back on track (this opens the debate of whether it makes to try to push banks to start lending again very aggressively again as it is this type of uncontrolled lending by banks that got us in this mess in the first place, but this is another debate), then quantitative easing may be next in line as an attempt to again kickstart lending. The idea of quantitative easing is to increase money in circulation through the printing of money that will be used to buy most probably asset back securities (the same assets that got us into this mess). One of the ideas is buying asset back securities collateralised by residential mortgages. By arguing that people do not buy houses because banks do not lend the money and banks do not lend them the money because they get rid of the mortgage risk that would sit on their books, well let's bring securitisation whereby you issue bonds collateralised by mortgages and you just need to find a buyer for them. That where quantitative easing steps in. The BOE prints money in order to buy these assets and effectively starts indirectly lending money to the economy. Quantitative easing is negative for a currency because it increases money in circulation and the value of a currency is a function of relative money circulation in the world. If the UK doubles the money in circulation and nobody else does it, then on a relative basis and assuming nothing else changes (there is no effect on the economy for instance) the value of the pound should be instantaneously halved with respect to other currencies. This would be a negative obviously for foreign investors as it would be seen as debasing the currency on a relative basis to kickstart the economy but without benefitting the older of gilts for instance. If the UK were to start printing money and I was a foreign investor I would dump my sterling investments. That's a natural reaction. I may come back sometime in the future if the economy gets back into shape and quantitative easing is reversed, i.e. if the BOE starts decreasing money in circulation. Well, this could take a while so I'm better off exiting a depreciating currency. Another debate would be to question whether it makes sense to force aggressive lending back into fashion when we got into trouble because of unbridled lending in the first place. Certainly banks are not lending aggressively anymore but they are in such a trouble that they can't increase the size of their balance sheet. What the BOE is offering to do is to try to maintain a status quo by not allowing values to reach an equilibrium that would reverse the madness we have seen in the last few years. By letting borrow 5 times or more their salaries in order to buy properties for instance so that you put a floor to the real estate market and you start earning money again by charging a stamp duty for instance, you're just delaying the inevitable price adjustment that needs to occur in the housing market. BOE needs to understand they cannot fight this readjustment. Quantitative easing is doomed. It may produce an impression of rebound in the economy because people would buy again because somebody would be ready to lend them but in the long term, this would only increase the amount of pain inflicted by the inevitable price adjustment. We need to be done with these days of ultra borrowing and clean up the mess as quickly as possible, even if it is very painful in the short term otherwise we're talking about more than a generation of pain, indebtedness and misallocation of ressources. The problem is the UK is in a very very bad economic situation. It is in the position of the gambler sitting at a table with such a huge loss. Either you call it quit and you try to rebuild but it's gonna be painful but you'll be back. That would be prudent and would show some good risk management. The other solution, and it is the one favored by the BOE and the government, it is to go all in with a very weak hand. Well, it's called going for broke.
Brendan R The problem is the UK is in a very very bad economic situation. It is in the position of the gambler sitting at a table with such a huge loss. Either you call it quit and you try to rebuild but it's gonna be painful but you'll be back. That would be prudent and would show some good risk management. The other solution, and it is the one favored by the BOE and the government, it is to go all in with a very weak hand. Well, it's called going for broke. ................................................................................. Perfectly said.... The same is happening in the USA....
Marginal value is a term widely used in economics, to refer to the change in economic value associated with a unit change in output, consumption or some other economic choice variable. The concept of marginal value is similar to the mathematical concept of the derivative of a differentiable function, or to related concepts such as the arc derivative (slope of a secant line for more general functions). In economics, the demand curve can be defined as the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule [1]The demand curve for all consumers together follows from the demand curve of every individual consumer: the individual demands at each price are added together. Demand curves are used to estimate behaviors in competitive markets, and are often combined with supply curves to estimate the equilibrium price (the price at which sellers together are willing to sell the same amount as buyers together are willing to buy, also known as market clearing price) and the equilibrium quantity (the amount of that good or service that will be produced and bought without surplus/excess supply or shortage/excess demand) of that market.[2] Causes of shift in demand * Changes in disposable income * Changes in taste and fashion * The availability and cost of credit * Changes in the prices of related goods (substitutes and complements) * Population size and composition * Expectations
The Banks I think are being setup by the (useless) politicians so when things don't get better they can just blame the banks for 'not lending'. Amazing how the sheeple follow the latest mantra that's stuffed down their throats - 'the banks must lend, the banks must lend, it's the fault of the banks that there's no light at the end of the tunnel, because they won't lend'. But as Mish says - Lend to whom and for what? Those that need loans are in no fit state to carry more debt so are rightly refused. Those that aren't in debt don't really want to borrow. And what about companies who are in good shape, do they want to take on more debt when they've seen what happens to companies that got overstretched, or were built soley on debt? Maybe, but I'm sure many of them will be in no rush, and also, why borrow to buy assets today when it looks highly likely that next month those assets will be cheaper.........